Lenders must respond to real estate disruption

Innovation in the industry will require debt providers to rethink how they underwrite certain properties.

When property finance professionals gather en masse, the topics of discussion typically centre around where spreads are, how leverage is shifting and where exactly we are in the real estate cycle.

Those were again chewed over at the recent London conference hosted by the Commercial Real Estate Finance Council Europe. But there was an overriding subject that dominated the agenda; innovation.

Fundamental changes to the nature of some real estate segments are already happening, agreed most speakers and panellists at the event. Technology is usually the driver of that change, disrupting an industry which, by its nature, is all about the long-term and the tangible.

The fact is the underlying property markets to which lenders provide finance are evolving rapidly. That requires fresh thinking from risk-averse writers of loans about how to capitalise on market trends and provide debt in unfamiliar situations.

The innovations on display at the CREFC conference were fascinating. They included proptech such as an app that promises to transform commercial real estate investment appraisals (the dynamic-sounding DashFlow).

There was also discussion about big data, including findings by consultancy firm CACI about retail trends, highlighting just how much data industry people have at their fingertips.

Retail is a sector most obviously undergoing a transformation, due to the impact of e-commerce. The traditional shop, as well as the traditional logistics facility, is being reinvented as consumers opt to shop from their phones. Delegates also heard from an architect about the need to design flexible apartments that appeal to families as well as those opting for co-living.

The boss of Plexal, a tech industry-focused co-working scheme based in East London, explained that creating square feet dedicated to yoga and improv classes, spaces for punters to congregate and discuss their projects, plus a selection policy ensuring workers within the building are of a similar professional ilk, can help create a new type of office.

Within the real estate lending space itself, technology and innovation are already having an impact, notably in the fintech firms and online platforms aiming to challenge traditional sources of debt. They might lend on a much smaller scale than many of the bankers and alternative lenders attending CREFC, but the digital processes they are promoting speed up underwriting and originating.

The pace of change in real estate shouldn’t worry those at the debt end of the bricks and mortar industry. A message heard throughout the conference was that, although the built environment is evolving, people still need property. Technology is revolutionising retail, but people still need places to pick up online purchases; a growing workforce might now have the tools to work remotely, but they still value working alongside other people within co-working schemes.

The challenge lenders face is figuring out how to underwrite sectors that have the potential to look very different by the end of their five-year loan term. Indeed, accepted notions of loan tenor, valuation, pricing and leverage will need reconsidering when it comes to newer types of property.

In the short-term, this presents a conundrum for lenders, and liquidity will be constrained in sectors such as co-living/co-working and last-mile logistics. It will take lenders willing to be the first to set standards within changing sectors to prove to others that less traditional assets can be financed, leading to the cost of capital for such loans gradually coming down.

Europe’s real estate finance sector looks significantly different today to 10 years ago, with lenders of different stripes providing alternative capital to borrowers, demonstrating that the sector does move with the times. Staying aware of risk in a changing market is paramount, but so too is the ability to adapt.

Email the author: daniel.c@peimedia.com

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